The IMF has released a report highlighting the effect of the current financial meltdown on the Sub-Saharan Africa region. The regional growth rate is expected to slow down to 6% in 2008 and 2009, down from 6.5% in 2007, because of the impact of rising commodity and fuel prices in oil-importing countries and the worsening impact emanating from financial meltdown in the West. Meanwhile, inflation is expected to shoot to 12% and 10% in 2008 and 2009 respectively (how much has hyperinflation in Zimbabwe skewed this number?). Concerns on remittance and private capital flow to Africa remain high amidst the worsening financial crisis.
…So far, the main effects of the global financial turmoil appear to be indirect, in the form of slower global growth and volatile commodity prices. Recent heightened turbulence raises the risks, including of a decline in resource flows to Africa in the form of private capital, remittances, and even aid.
The challenge for policymakers is to adjust to the food and fuel price shock, preserve economic stability in the face of global financial turbulence, and shield the poor. With food and fuel prices substantially off recent peaks, it should be easier to fully pass through higher prices to the economy to encourage adjustment. With food accounting for a major part of household expenditure, the resulting loss in the purchasing power of the poor is a serious concern. Measures to cushion the impact of higher food and fuel prices on the poor therefore need to be well targeted—and also supported by donors. For oil exporters a particular challenge is to preserve a medium-term perspective; caution use of oil revenue windfalls permits smoothing of fiscal spending in the face of price declines as well.
Here are some important observations about Sub-Saharan African growth:
- Sub-Saharan Africa has enjoyed a remarkable growth takeoff since the mid-1990s.
- Sustained growers in sub-Saharan Africa have gotten the critical basics right and avoided major policy failures.
- Recent African success stories also demonstrate that governments need to play a proactive role but that there is no simple recipe for achieving high growth.
- Higher aid has been part of the story for fast growers that have not benefited from large resource rents, providing room for higher social spending and public investment and promoting or at least being consistent with fast growth.
- High growth cannot be taken for granted.
The IMF, which is more obsessed with the free market ideology than its sister organization, WB, quite surprisingly argues that the government can do a lot to stimulate economic growth. Remember that, unlike in the past the IMF recently supported the $700 rescue package while it opposed a bail out package during the 1997 Asian Financial Crisis (especially in South Korea and Indonesia, which it described as not having as “systemically important” financial institutions as the US has right now!). Here, it also supports country specific growth policies, unlike in the past!
Countries need to choose policies that allow them to benefit from what is happening externally, preserve macroeconomic stability, promote effective public and private investment, and ensure that all share in the benefits of growth, which must include improvements in health, education, and the other areas addressed by the MDGs as well as income. Moving toward growth trajectories that emphasize value added and nontraditional exports—paths that characterize most sustained fast growers in other regions—is not easy, but it can be done.
More on financial crisis and IMF: Can the IMF save the world?
Special section on the financial crisis from the BBC News here.